Investors are being "ripped off" by high charges, experts tell Kyle
Caldwell.

Thousands of investors are paying over the odds for popular "tracker" funds, research for Telegraph Money has found. In extreme cases, the fees for one tracker can be 10 times as high as on another, almost identical fund, creating a costly drag on long-term returns.

Tracker or "passive" funds replicate a stock market index, such as the FTSE All Share, and so are cheaper to run than rival "actively managed" funds whose managers select and oversee stocks. Yet some trackers take 1.5pc a year in charges, a rate comparable with actively managed portfolios. The cheapest trackers are available at just 0.15pc a year, according to research for Telegraph Money by broker Bestinvest, while the average being paid by private investors is 0.75pc.

Trackers have grown in popularity in recent years as many investors have become disillusioned with the merits of active fund management.

The biggest providers of passive funds, such as Vanguard and HSBC, charge total costs of less than 0.3pc for their index-tracking funds.

Key players in the market, including Legal & General Investments and Architas, have recently reduced charges. Legal & General's £4.4bn UK Index fund now carries a 0.15pc management charge, with dealing and other costs bringing the total drag on investors' returns to 0.18pc. Earlier this month, Architas scrapped its annual management charge for the group's passive funds; instead, investors will pay a one-off 2pc entry fee and a total cost of 0.2pc annually.

While some investment experts have heralded the cuts as the beginning of a "passive price war", others have warned existing investors in less attractively priced trackers to move their money.

Ben Seager-Scott, a passive investment specialist at Bestinvest, said: "As the popularity of index funds has increased, we have seen the competitive landscape develop, and increasingly there is a gap between those that are competing hard and others that seem to be stagnating."

Investors in the latter are being "ripped off", he said. "Looking at traditional UK stock market trackers, funds such as the HSBC All Share Index and Fidelity Moneybuilder UK Index are available at costs of less than 0.3pc. This compares with costly rivals like the £2.4bn Virgin UK Index tracker, which is more than three times as expensive at 1pc."

While new flows of money into these overpriced funds are likely to be small, he said existing investors were unlikely to know by how much they were overpaying. "The depressing reality is that these funds have lots of existing investors who aren't aware that they are being ripped off."

Financial advisers argue that while charges should be a prime consideration, there are other factors investors should bear in mind. Foremost is the selection of the index being tracked. For example, the HSBC FTSE 250 index has returned 38.5pc over the past year, while the HSBC FTSE 100 index has delivered 27.7pc, according to data provider Morningstar, as Britain's medium-sized companies have outperformed their larger peers over the period.

Darius McDermott of broker Chelsea Financial Services said: "Investors also need to realise that different indices can carry a large bias to certain sectors, like banks, or oil and gas, which make up 10pc and 18pc of the FTSE respectively. With a tracker in effect you are buying last year's winners."

Another consideration when choosing passive funds is "tracking error" – how closely or otherwise an index fund actually mirrors the index it is designed to replicate.

Which are the cheapest index trackers?

A £10,000 lump sum invested in two funds that track the same index could produce significantly different outcomes, purely because of the charges.

For instance, the HSBC FTSE All Share Index fund carries a 0.27pc total charge, equating to a cost drag of just £27 a year. By contrast, the Halifax UK FTSE All Share Index Tracker – which will invest in exactly the same underlying stocks – charges 1.5pc a year, setting you back £150 annually. The "cost drag" of the latter will seriously reduce returns, particularly when investors hold the fund for many years.

Adrian Lowcock of Hargreaves Lansdown, the fund broker, said: "There are a number of index trackers out there which are charging over 1pc, and at that price investors should switch. Investors think because their fund is tracking a stock market they do not need to look at performance, when in fact the higher the charge the poorer the performance."

The worst trackers, in terms of price, include the Halifax UK FTSE All Share and the Virgin UK Index Tracker. Best-priced tracker providers include Legal & General Investments, HSBC and Vanguard, according to a range of advisers. As a rule of thumb, when the index being tracked is a major one – such as the FTSE All Share – total costs should not exceed 0.5pc.

Out of a total of 35 funds now tracking a major UK index, one in three charges more than 1pc.